Santander Consumer Bank AG

Transcription

1 Primary Credit Analyst: Heiko Verhaag, CFA, Frankfurt (49) ; Secondary Contact: Bernd Ackermann, Frankfurt (49) ; Table Of Contents Major Rating Factors Outlook Rationale Related Criteria Related Research SEPTEMBER 4,

2 SACP bbb+ + Support 0 + Additional Factors 0 Anchor a- Business Position Capital and Earnings Moderate -1 Strong +1 Risk Position Moderate -1 Funding Liquidity Average Adequate 0 ALAC Support 0 GRE Support 0 Group Support 0 Sovereign Support 0 B+/Stable/A-2 Major Rating Factors Strengths: Weaknesses: Large market share in the consumer finance business in Germany. Strong risk-adjusted profitability and capitalization. High granularity of the loan portfolio. Large exposure to volatility in the consumer finance business. Concentration in a few business segments. Limited growth potential in the competitive German consumer finance market SEPTEMBER 4,

3 Outlook: Stable S&P Global Ratings' outlook on Germany-based Santander Consumer Bank AG (SCB) is stable, reflecting our view that material changes to SCB's strategy and financial profile are unlikely over the next months. Furthermore, our view of SCB's core group status to Spain-based Santander Consumer Finance S.A. (SCF; B+/Stable/A-2) is unlikely to change during that period, such that our ratings on SCB will likely move in tandem with that on SCF. Downside scenario As long as we continue to consider SCB a core member of SCF, any deterioration in SCB's stand-alone credit profile (SACP) would be offset by uplift from extraordinary group support. We could nevertheless lower the rating on SCB if we were to lower the rating on SCF. This could be triggered by a similar action on the ultimate parent Banco Santander or the Spanish sovereign, or if we believed Banco Santander Group's commitment to the SCF consumer finance business had weakened. In addition, a weakening of SCB's importance to SCF could lead us to lower the rating, although we view this as remote over the next 24 months. Upside scenario Conversely, a positive rating action on SCF would result in a similar action on SCB. An upgrade of SCF would be triggered by a similar action on both Banco Santander and the sovereign, or by our revision of SCF's status within the group to core. An improvement in SCB's stand-alone creditworthiness alone would be unlikely to result in an upgrade of SCB. However, an upgrade could follow if we were also to assess SCB as insulated from SCF, or if we anticipated a distinct resolution strategy for SCB, independent from the rest of the group. Rationale The 'B+' long-term rating on SCB is based on our 'a-' anchor for German domestic banks and the bank's high market share and concentration in the German consumer finance niche. The rating also takes into account our forecast of a risk-adjusted capital (RAC) ratio between 12.0%-12.5% over the next months. In addition, the rating reflects the concentration of SCB's loan book on consumer finance, which lacks the diversification of universal bank peers. We also take into account the bank's diversified funding profile dominated by retail deposits and its comfortable liquidity position. Based on these factors, we view SCB's SACP at 'bbb+'. Furthermore, in our view SCB is a core subsidiary of its intermediate parent SCF and contributes close to 40% to the lending volume of SCF. We expect SCB's strategy will remain aligned with that of Banco Santander Group's consumer finance strategy. The group support does not result in uplift currently, with SCB's SACP of 'bbb+' being at the same rating level as our issuer credit rating on SCF. Anchor: 'a-' for banks operating only in Germany Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating (ICR). Our anchor for a commercial bank operating mainly in Germany is 'a-', based on an economic risk score of '1' and an industry risk score of '3'. We view the economic risk trend in the German banking industry as negative and the industry risk trend as stable. Our economic risk assessment reflects Germany's highly diversified and competitive economy, which we believe SEPTEMBER 4,

4 remains robust in the face of projected fragile and sluggish improvements in economies and financial markets across Europe until 2018 as well as the potential for limited negative effects from the U.K. referendum decision to leave the EU (Brexit). Despite accelerated house-price increases, we currently do not see major economic imbalances given that these price rises are not accompanied by credit expansion in the German economy. We anticipate that the German housing market will remain undervalued by the end of 2018 in affordability terms. However, as an export-led nation, Germany remains vulnerable to swings in global economies, trade flows, and capital market trends. Our negative economic risk trend mainly captures a one-in-three possibility that we could revise our current assessment of a very low risk of economic imbalances within the next 24 months if we see higher house-price increases than the average 5.6% between 2016 and 2018 that we currently forecast, or if we observed strong lending expansion or materially softer underwriting standards in the German banking industry. Industry risk benefits from Germany's extensive funding market and banks' domestic funding surpluses, as well as from material improvements that have been made to strengthen banking regulation and supervision given ongoing EU-wide regulatory harmonization and convergence as banks implement Basel III. However, we believe that strong competition in German markets, coupled with an ultra-low interest rate environment, remain drags on profitability, although this is currently mitigated by historically low credit losses in Germany. We classify the likelihood of the German government providing extraordinary support to systemic domestic banks as uncertain, as is the case for most other European banks. This is because, following the full implementation of the EU's enhanced bank resolution framework in 2015, governments such as Germany that wish to provide support to stressed banks are constrained from directly bailing them out. Table 1 Santander Consumer Bank AG Key Figures --Year-ended Dec (Mil. ) Adjusted assets 43, , , , ,629.4 Customer loans (gross) 31, , , , ,502.5 Adjusted common equity 2, , , , ,490.9 Operating revenues 1, , , , ,410.6 Noninterest expenses Core earnings Business position: Concentrated position in the German consumer finance market We consider SCB's business position to be moderate, owing to its fairly concentrated business model. We see it as potentially more susceptible to swings in economic trends than a traditional retail bank's business model, however we note that SCB's operating income after credit losses proved relatively stable over the last economic cycle. Moreover, margin pressure in Germany's highly competitive consumer finance market appears to limit SCB's growth potential, given that it aims to maintain risk-adjusted profitability. While the corporate banking activities have the potential to further diversify SCB's revenue streams and to profit from the global franchise of Banco Santander Group, we regard this more as a long-term possibility. Also the retail mortgage business will only gradually develop in our view. These weaknesses are only partly offset by SCB's strong domestic market share of about 13% in the niche auto loan SEPTEMBER 4,

5 and consumer finance market. SCB's consumer finance division has one of the most cost-efficient operations among its peers. Its business position also benefits from the increased diversification realized through the acquisition of SEB AG's retail operations in 2011, which added domestic retail mortgages to the portfolio. In our view, the announced restructuring of its brands and branch network will have a positive earnings impact from 2020, through reduced operating costs and increased revenues. However, we expect 2017 or 2018 net income will be reduced by onetime restructuring charges, whose size will depend on the negotiation outcome with the workers council. We believe the increased efficiency will nevertheless enable SCB to better cope with a continued low interest environment and defend its market share in a very competitive market. Table 2 Santander Consumer Bank AG Business Position --Year-ended Dec (%) Loan market share in country of domicile Deposit market share in country of domicile Total revenues from business line (mil. ) 1, , , , ,410.6 Return on equity Capital and earnings: Strong capitalization, despite profit transfer agreement We assess SCB's capital and earnings as strong. This is based primarily on our forecasted S&P Global Ratings' RAC ratio in the range of 12.0%-12.5% by year-end Based on a profit transfer agreement, SCB upstreams all of its profits to SCF such that we do not expect any capital build up over the coming years. Based on a common equity tier-1 ratio of 13.2% as of year-end 2016, coupled with the bank's ambition to further expand its lending business over the next years, we expect a deterioration of our RAC ratio from the 12.6% level as of year-end Our assessment of the quality of capital acknowledges that the total adjusted capital largely consists of high-quality common equity. We believe that SCB's earnings generation, as a potential first line of defense in case of increasing credit losses, will remain strong, thanks to stable high-margin lending. We estimate SCB's earnings buffer--which measures the capacity for a bank's preprovision earnings to cover normalized (annual average through the cycle) losses--at 200 basis points (bps)-230bps, which is stronger than that of most German retail banks. Table 3 Santander Consumer Bank AG Capital And Earnings --Year-ended Dec (%) Tier 1 capital ratio S&P Global Ratings' RAC ratio before diversification S&P Global Ratings' RAC ratio after diversification Adjusted common equity/total adjusted capital Net interest income/operating revenues Fee income/operating revenues SEPTEMBER 4,

6 Table 3 Santander Consumer Bank AG Capital And Earnings (cont.) --Year-ended Dec (%) Noninterest expenses/operating revenues Preprovision operating income/average assets Core earnings/average managed assets RAC--Risk-adjusted capital. Table 4 Santander Consumer Bank AG Risk-Adjusted Capital Framework Data ( 000s) Exposure at default Basel III RWA Average Basel III RW (%) S&P Global Ratings' RWA Average S&P Global Ratings' RW (%) Credit risk Government and central banks 1,752, ,065 0 Institutions and CCPs 1,452, , , Corporate 6,558,949 5,243, ,107, Retail 23,787,223 11,458, ,785, Of which mortgage 3,496,861 1,219, , Securitization* 2,021, , , Other assets 532, , , Total credit risk 36,105,249 17,486, ,419, Credit valuation adjustment Total credit valuation adjustment -- 11, Market risk Equity in the banking book 5, ,250 1,250 52, Trading book market risk Total market risk , , Operational risk Total operational risk -- 2,293, ,547, Basel III RWA S&P Global Ratings' RWA % of S&P Global Ratings' RWA Diversification adjustments RWA before diversification 20,096,637 20,019, Total diversification/concentration adjustments -- 1,371,789 7 RWA after diversification 20,096,637 21,390, Tier 1 capital Tier 1 ratio (%) Total adjusted capital S&P Global Ratings' RAC ratio (%) Capital ratio Capital ratio before adjustments 2,647, ,515, Capital ratio after adjustments 2,647, ,515, SEPTEMBER 4,

7 Table 4 Santander Consumer Bank AG Risk-Adjusted Capital Framework Data (cont.) *Securitization exposure includes the securitization tranches deducted from capital in the regulatory framework. Other assets includes Deferred Tax Assets (DTAs) not deducted from ACE. Adjustments to Tier 1 ratio are additional regulatory requirements (e.g. transitional floor or Pillar 2 add-ons). RWA--Risk-weighted assets. RW--Risk weight. RAC--Risk-adjusted capital. Sources: Company data as of Dec. 31, 2016, Standard & Poor's. Risk position: Concentration risk in consumer finance loans In our view, SCB's overall risk position is moderate, and a relative weakness compared to that of larger peers. Our assessment reflects concentration risk in its loan book because it is heavily weighted toward German consumer finance exposures. In our view, the credit quality of such exposures is inherently more volatile, and losses in a stress environment might be higher than for secured retail banking products like mortgages. In a strong economic downturn, losses could accumulate rather quickly. However, we note SCB's track record of limited losses compared with those of its pure consumer finance peers, demonstrating a more conservative approach to risk. The current economic environment in Germany results in very favorable risk metrics, with a nonperforming loan ratio of 2.1% and cost of risk of 31bps in We anticipate that these metrics have likely bottomed out, and that cost of risk will normalize to 50bps-100bps over the medium term. We understand that SCB intends to develop its retail mortgage and corporate business, but we doubt that this would lead to a material improvement in risk diversification within the next two to three years. In our view, the loan portfolio will continue to be dominated by car financing and unsecured consumer lending. Table 5 Santander Consumer Bank AG Risk Position --Year-ended Dec (%) Growth in customer loans (1.0) (1.1) 7.1 Total diversification adjustment/s&p Global Ratings' RWA before diversification 6.9 (0.7) (0.4) (3.8) (8.2) Total managed assets/adjusted common equity (x) New loan loss provisions/average customer loans Gross nonperforming assets/customer loans + other real estate owned Loan loss reserves/gross nonperforming assets RWA--Risk-weighted assets. Funding and liquidity: Franchise-based and online deposits, complemented by securitizations Our average assessment of SCB's funding profile compared with domestic peers' is a forward-looking one that assumes that the bank will successfully broaden its long-term funding sources. The stable funding ratio, S&P Global Ratings' measure of available long-term funding relative to long-term funding needs, was 80% in This level is lower than we see among local peers, which often show ratios comfortably above 100%. However, we expect this ratio to improve in the medium term, with the issuance of covered bonds and senior notes, and we also note the bank's limited use of short-term wholesale funding sources. We believe that customer deposits, which are largely granular retail deposits, will remain the main funding source for SCB, currently covering 78% of the funding base. While asset-backed securities have historically been an important funding vehicle for SCB, the bank has recently retained most of them on its own books as available collateral for opportunistic funding from the European Central Bank (ECB). In our view, SCB has SEPTEMBER 4,

8 sufficient and highly diversified sources to replace ECB funding in the medium term. SCB's liquidity is adequate, in our view, based on the bank's negligible reliance on short-term wholesale funding. Our liquidity ratio (broad liquid assets to short-term wholesale funding) was comfortable at 2.7x in We also consider the potential benefits and stability provided by SCB's membership in the Banco Santander Group, although no committed facilities exist as far as we know. Table 6 Santander Consumer Bank AG Funding And Liquidity --Year-ended Dec (%) Core deposits/funding base Customer loans (net)/customer deposits Long-term funding ratio Stable funding ratio Short-term wholesale funding/funding base Broad liquid assets/short-term wholesale funding (x) Net broad liquid assets/short-term customer deposits 7.1 (5.0) (0.8) Short-term wholesale funding/total wholesale funding Narrow liquid assets/3-month wholesale funding (x) Support: No notches of uplift to the SACP We currently do not incorporate any extraordinary group support into SCB's rating, given that we assess its intrinsic creditworthiness as equal to that of its intermediate parent, SCF. However, if in our view of SCB's SACP weakened, we would continue to rate it in line with SCF as long as the group status remains unchanged. Our ratings on SCB do not benefit from uplift for additional loss-absorbing capacity. We understand that, unlike other group subsidiaries, the German operations have not been identified as a separate point of entry in the event of a resolution of Banco Santander. The rating on SCB could also benefit from the build-up of additional loss-absorbing capacity at the Banco Santander level. Additional rating factors: None No additional factors affect this rating. Related Criteria Criteria - Financial Institutions - General: Risk-Adjusted Capital Framework Methodology, July 20, 2017 General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 Criteria - Financial Institutions - Banks: Bank Rating Methodology And Assumptions: Additional Loss-Absorbing Capacity, April 27, 2015 Criteria - Financial Institutions - Banks: Bank Hybrid Capital And Nondeferrable Debt Methodology And Assumptions, Jan. 29, 2015 General Criteria: Group Rating Methodology, Nov. 19, 2013 Criteria - Financial Institutions - Banks: Quantitative Metrics For Rating Banks Globally: Methodology And SEPTEMBER 4,

9 Assumptions, July 17, 2013 Criteria - Financial Institutions - Banks: Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Criteria - Financial Institutions - Banks: Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Related Research Germany-Based Santander Consumer Bank Outlook Revised To Stable From Positive; 'B+/A-2' Ratings Affirmed; June 12, 2017 Outlook On Spain-Based Banco Santander S.A. Revised To Stable From Positive On Acquisition Of Banco Popular Espanol, June 9, 2017 Outlook On Spain-Based VA And Santander Consumer Finance Revised To Positive Following Action On Sovereign; April 3, 2017 Research Update: German Credit Institution Santander Consumer Bank Assigned 'B+/A-2' Ratings; Outlook Stable, March 30, 2017 Outlook On Banco Santander 'A-' Long-Term Rating Revised To Positive On Expected Sizable ALAC Buffer; Ratings Affirmed, Feb. 9, 2017 Banco Santander S.A., Dec. 23, 2016 Santander Consumer Finance S.A., Dec. 20, 2016 Banking Industry Country Risk Assessment: Germany, Sept. 7, 2016 Anchor Matrix Industry Risk Economic Risk a a a- bbb+ bbb+ bbb a a- a- bbb+ bbb bbb bbb a- a- bbb+ bbb+ bbb bbb- bbb- bb bbb+ bbb+ bbb+ bbb bbb bbb- bb+ bb bb - 5 bbb+ bbb bbb bbb bbb- bbb- bb+ bb bb- b+ 6 bbb bbb bbb- bbb- bbb- bb+ bb bb bb- b+ 7 - bbb- bbb- bb+ bb+ bb bb bb- b+ b bb+ bb bb bb bb- bb- b+ b bb bb- bb- b+ b+ b+ b b+ b+ b+ b b b- Ratings Detail (As Of September 4, 2017) Santander Consumer Bank AG Counterparty Credit Rating Counterparty Credit Ratings History 12-Jun Apr Mar-2017 B+/Stable/A-2 B+/Stable/A-2 B+/Positive/A-2 B+/Stable/A-2 SEPTEMBER 4,

10 Ratings Detail (As Of September 4, 2017) (cont.) Sovereign Rating Germany (Federal Republic of) AAA/Stable/A-1+ Related Entities Abbey National Capital Trust I Preferred Stock Banco Popular Espanol S.A. B+/Positive/A-2 B+ Banco Santander (Brasil) S.A. /Negative/B Brazil National Scale braa-/negative/bra-1+ Junior CCC+ B Banco Santander-Chile S.A. A/Negative/A-1 Commercial Paper Foreign Currency A-1 A A- Banco Santander S.A. A-/Stable/A-2 Certificate Of Deposit Local Currency A-2 Commercial Paper Local Currency A-2 Preference Stock Preferred Stock Preferred Stock + A- Short-Term Debt A-2 B B+ Banco Santander Totta S.A. +/Stable/B + Santander Asset Management Investment Holdings Ltd /Watch Pos/B Santander Bank, N.A. B+/Stable/A-2 B+ Short-Term Debt A-2 B Santander Consumer Finance S.A. B+/Stable/A-2 SEPTEMBER 4,

11 Ratings Detail (As Of September 4, 2017) (cont.) Commercial Paper Local Currency A-2 Short-Term Debt A-2 Santander Holdings U.S.A Inc. Preferred Stock Santander UK Group Holdings PLC Junior B+ Short-Term Debt A-2 Santander UK PLC Junior Junior Preference Stock Preferred Stock Short-Term Debt A-1 Sovereign Real Estate Investment Trust Preferred Stock B+ B+/Stable/A-2 B+ B/Stable/A-2 B + A/Negative/A-1 *Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings credit ratings on the global scale are comparable across countries. S&P Global Ratings credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. + A B- B- Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@spglobal.com SEPTEMBER 4,

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